Wednesday, April 16, 2008

Rent vs. Own

Everyone I know keeps on asking me why I'm renting an apartment instead of buying a house or condo. Some even go as far as to say I'm stupid for throwing money away on rent. I think I'd like to share my rationale on the subject.

The way I see it, it makes more financial sense for me to rent than it does for me to buy something. First of all, when I do buy, I won't be buying something for the sake of buying. I intend to buy a place that I wouldn't mind living in for a good portion of my life. I'm not going to buy some crappy condo for my first home. It's going to be a nice place that has the furnishings and amenities that I want. Perhaps, I'll buy a house first. I haven't ruled that out. I suppose it depends on if I'm still single when I decide to take that leap into homeownership (and there's a high probability I will still be single, so most likely I'll just go for the condo).

I see and hear stories about people buying these houses that they can't really afford. They take out these huge mortgages and end up paying close to $2,000/month on them. That's a lot of money to be paying on just mortgage alone. It really doesn't leave a lot of room to save any money (outside of a 401k). Moreover, you end up spending so much money on the mortgage that you can't afford to go out and buy nice things for yourself or for the house at a moment's notice.

Right now, I pay almost $1,000/month on my little apartment. That's pretty standard for this area. I still have a student loan and a car loan to pay off. Despite these expenses, I live pretty darn comfortably. I can afford to buy pretty much whatever I want (within reason), when I want. If I want a new watch, I can go out and get one. A few months ago, my computer crashed, and I needed to buy a new one. I simply went online and ordered myself a fairly high performance laptop, and I didn't even have to dip into my savings account. When I went to Miami, I paid for my airfare, hotel, and spending money without touching my savings account. That's not to say I frequently make big purchases. I'm just saying that whenever something comes up or something catches my eye, I don't have to stop and worry if I'll have enough money. Oh yeah... Despite what I spend on rent, student loans (I make 3 times the minimum payment every month), my car loan, utilities, and whatever money I need for gas and groceries, I still manage to put about $2,000/month into my savings account.

What I'm trying to say is that I live a pretty comfortable life, and while I may be "throwing away" money by renting, I still manage to save a pretty good amount. My plan is that I when I have a good enough chunk of change saved up, I'll put a pretty large down payment on a place. It'll hopefully be enough so that my monthly mortgage payment is no more than $1,200. I just feel like this is the financial plan that makes the most sense to me for my situation. It doesn't apply to everyone. It just works for me.

Let me put it this way: Let's say I went and bought a condo tomorrow. I don't have a whole lot of money in savings right now, so I wouldn't be able to afford a big downpayment. Therefore, I'd have a pretty high mortgage probably in the neighborhood of $1,600-1,700/month. Since I'm sure that whatever place I get would be bigger than my current apartment, my utility bills would go up. Now, all of a sudden I can't put away that $2,000/month like I do. Right now, the housing market isn't exactly booming, so who knows how much that condo will appreciate a few years down the road. Let's just say, for shits and giggles, that its value increases by $50,000 5 years from now (I can't imagine that being likely). I sell that condo and make a nice $50,000 profit on it. Sounds good, right?

Well, let's take a closer look. At my current rate of saving, I can save $120,000 in 5 years. Therefore, if I stayed in my apartment, at the end of 5 years, I'd have $120,000 in my savings account. If I bought a condo and sold it for a $50,000 profit 5 years down the road, but since I was spending more on mortage I could only save half the amount of money (a generous estimate) I used to, I'd end up with $110,000 in my savings account after 5 years.

From that analysis in which I most likely overestimated the appreciation of the condo and my ability to save money while paying a high mortgage, after 5 years I'd have more money if I rented than if I bought. Moreover, having a substantially higher mortage payment than my current rent payment, I'd have to change my lifestyle a little bit and sacrifice some of my bigger expenses. Sure, I'd catch a tax break from being a homeowner, but even factoring that in, I can't see how it would make more sense to buy.

Like I said, I'll stay in this apartment until I have enough money to make a down payment that will cause my monthly mortage payment to be reasonably close to my current rent payment. By that time (2 or 3 more years) my student and car loans will be pretty close to paid off. That means that I'll be able to have the same kind of lifestyle I do now (as far as leisurely spending), but I'll also be able to save plenty of money for retirement (in addition to my 401k) or for my kids' college (if I ever get married and have kids). That's not to mention the equity I would have if my home appreciated.

Once again... This reasoning can't be applied to everyone. For one, it doesn't make any sense at all for someone making much less money than I do. If a rent payment is too high for you to put any money into savings, then you're better off buying a low cost place that will appreciate over time. In that way, you'd still be paying roughly the same amount in mortgage as in rent, but you'll at least have some equity from the appreciated home. Being married or engaged also changes the way you have to look at things. I know that if I were married or about to be married, I'd be looking into buying now.

As a single guy with no marriage prospects on the near horizon and making pretty decent money, it seems to just make a lot more sense to me to rent.

(I feel like printing off copies of this and handing them out to everyone who asks me about this. I seriously get asked this way too often.)


Carol said...

I rent for pretyt much the same reasons you do. the only way to make money on real estate is to pay cash on the barrelhead. Otherwise, you're just giving the bank inteerst money. Or, as I call it, money for nothing. I onc figured it out, and even at a very low interest rate, you wind up paying roughly 3 time sthe cost of your house with a mortgage. that's called interest folks. so if those idjits who say you are throwing your money away on rent holler again, whip out your calculator and figure out how much their payments ove rthe lifetime of the mortgage add up. i'll bet it's more than the house cost them. AND they won't get that much if they sell it either...

Anonymous said...

How are we ever going to meet if you're such a recluse?

Anonymous said...

Hey Mike:
Renting a reasonably priced abode makes good sense. Since my divorce, I have lived in a small cottage for 9 years and haven't had to pay property taxes or upkeep/maintenance. And renter's insurance is cheaper than homeowner's insurance. It's a very modest place, but I do not need more than this 2 bedroom, one bath home -- I live alone. Who am I trying to impress? No one. When I need a house, I hope to pay cash for it -- or at least put down a large down-payment (like you). Yes, with the buyer's market for homes, I have been tempted to take the plunge and buy a house. However, my parents live out of town and are aging. I may have to move in with them and help with their care. Why should I buy a house when I may have to move and sell it in less than 5 years and possibly take a loss, when one or both of my parents experience failing health? Renting comes at a price, but it gives you much more freedom and less hassle when you have to move, should the unexpected (or expected) comes home to roost. A friend of mine (who recently moved out of state) has had her previous house on the market for over a year. She has been in the unfortunate position of paying 2 mortgages, 2 insurance policies and double the upkeep on her real estate holdings. You can add in the stress of owning an out-of-state home you can't check on regularly. The property values in my particular area indicate she's probably not going to turn a handsome profit on her old house.
I suppose I'm just agreeing with you, but your post struck a strong chord with me.
Great blog, BTW. Take care.

Anonymous said...

Mike- I agree with your reasoning on renting vs owning. I do own a home and have lived there 17 years.
By renting you save on those items mentioned by the above others but also tools. Rakes, shovels, hoses, drills etc. You just need a whole lot more tools when you own. Also with a good landlord not only will they do the repairs but they may also do upgrades such as paint and carpet for a good long term renter. Owning is great when house values are going up, but that is not going on now in most places. You could buy and still lose value unless you are very careful.

Anonymous said...

Mike- You are so right in what you said. I rent too. People have pretty much gotten off my back over it.

When they do get on me (us) they are repeating what they have been told, that it is better to buy, without really thinking about it as you have. I may print up what you wrote too. So I can hand it out to people should the need arise.

I would also add that renting allows me to have the luxury of earning less money per year. I don't feel like I have to work like a dog. I am free to work less. Which I love. I have instead bought mental health!

Anonymous said...

Your analysis makes sense. BUT - right now youve got a golden opportunity.... property is cheap and getting cheaper. If you start looking around, you can get some real steals on property right now, that is sure to appreciate in the coming years. Maybe not as dramatically as in the past, but it will do well.

Then, you will have a mortage that is about the same as your rent, but the interest becomes tax deductible, giving you what ends up being a 30% dicount on your mortgage. Add in price appreciation (say you buy a house for 100K and it appreciates 5% per year - your real number shoudl be higher since you can probably buy at a 10-20% discount in this market), that means every year you make at least 5k on your property, plus being able to live at a discount.

THATS why buying makes sense... especially now.

Pharmacy Mike said...

I think this only applies to certain areas. Sure, if I want to get a house in a neighboorhood I'm not really too fond of, I can't find a great deal. However, if I want to live in a nice neighborhood close to work (the property values in the surrounding towns are astronomical), I'd have to pay quite a bit more.

You can't touch a decent condo for less than $200,000 around here. Moreover, if you wanted to get something like a townhouse style condo, it will run you over $300,000. Without a huge down payment, you're looking at a very large monthly mortgage payment.

At this point in time, I really don't want to be bothered with owning a house. Too much upkeep. I have trouble hanging up my clothes. There's no way I'll want to mow the lawn and do other yard work.

Anonymous said...

There are definately a lot of factors in deciding whether to rent or own. Prices, mainly, which depends on your area so not many of us can comment on that.

I'm actually closing on my first house in three weeks. I'm paying 150k for it, and with interested, that will come closer to 300k when the 30 year loan is up. WHEW!

I'm still a younger adult, just got out of college and I'm learning the ins and outs of financing. But one of the reasons I'm buying a house is because it's a living piggybank. With renting, obviously, you just write a check and that's the end of it. But when making a mortgage payment, most of it goes toward my actual ownership of the house. minus any interest or taxes.

All things being equal, if you can find a house where your mortgage would be the same as your current rent, then buying would obviously be the better option. But there are too many factors involved for anyone to tell you to make a choice.